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Production Linked Incentive (PLI) : Can India be the factory of the world?

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PLI 2.0: What to Expect

Unlike many of India’s Asian neighbours like China, Vietnam, and Taiwan, India’s growth story is led by its services sector. Manufacturing still contributes barely 15% to the country’s GDP. Unless manufacturing is given a significant push it is extremely difficult to go anywhere near the target of a $5-trillion economy by 2025 if India only relies on the farm and services sectors alone.

After Covid-19 struck in early 2020 and China closed itself to the rest of the world to stop the spread of the deadly virus, it was crystal clear that most countries, including India, were overly dependent on China for hardware, electronic components, etc. This led to the genesis of the PLI scheme or Production Linked Incentive in March 2020, to promote local production. In fact, not just India but several other countries that had outsourced much of their manufacturing to China are now looking at alternatives. For eg., the US passed the CHIPS Act in July last year to strengthen domestic semiconductor manufacturing design and research

What is PLI?

PLI scheme is a reward system to provide incentives to manufacturers to produce locally. The more goods companies manufacture in India the better incentives they will get. These incentives ranged from subsidies to monetary gains, etc. PLIs are offered to both foreign manufacturers and domestic companies. 

The idea was to reduce dependence on a single geography like China, cut down imports, make domestic industries more competitive globally and through all this make India more “Atmanirbhar”. 

PLI started with three manufacturing sectors but has now expanded to fifteen. PLI 1.0 was a step in the right direction considering the trend of deglobalization that has emerged since the pandemic. There are growing expectations of PLI 2.0 to be announced in the Union Budget 2023-24. Let’s first understand how has PLI 1.0 fared.

The progress so far

India has announced PLIs across 14 sectors with a total outlay of Rs 1.97 lakh crore, The goal is to create more jobs, national manufacturing champions, and additional production of Rs 30 lakh crore over the next five years. 

When it was initially introduced in 2020 the scheme focused on three sectors,

  • Pharmaceuticals
  • Electronics and Information Technology
  • Medical Devices

The scheme was later introduced in several other sectors (details in the infographic below)

Mobile handset sector – a roaring success

The PLI-led incentives announced in consumer electronics notably the mobile handset industry was a major hit. As per the scheme, making mobile phones in India priced at Rs 15,000 or more are eligible for an incentive of up to 6% on incremental sales of all mobile phones. 

Korea’s Samsung opened its biggest manufacturing facility outside Korea in the NCR a couple of years ago and has already beaten Xiaomi as India’s biggest seller – and exporter – of ‘Made in India’ smartphones.

Apple too announced that it has started manufacturing its current running model – the iPhone14 – in India and may soon shift almost half of its smartphone production to India by 2027.

Thanks to this, India’s exports of mobile phones touched $3.16 billion in FY21 from near zero in 2014. That’s not all. Apple exported Rs 11,000 crore worth of iPhones in FY 2021-22, but exports have already doubled as of December 2022. 

There is more than what meets the eye

Despite Samsung and Apple announcing mega investments in India, most of the manufacturing in India is still assembly work. Localization and indigenous production has not progressed much beyond packaging, charges, cables, etc. Some of the high-end components like chips and displays are still being imported from China, Korea, and Taiwan and being assembled here. 

Building an entire ecosystem of all essential components will only bring about real manufacturing in the country. 

There is an ongoing dispute between Samsung and the government on exactly how much value addition has happened and what level of “incremental sales” should be counted for the incentives. As per a news report, while Samsung has claimed around Rs 900 crore as incentives for FY21, the government is willing to pay only Rs 165 crore unless additional documentary evidence is produced in support of value addition.

Moreover, the success in the mobile handset market is yet to be seen in other sectors such as textiles, pharmaceuticals, specialty steel, and solar PV modules where PLI schemes have been announced.

PLI 2.0: What to Expect?

Several sunrise and strategic sectors have seen the PLI push like auto components, automobiles, aviation (drones), chemicals, food processing, medical devices, metals and mining, textiles, etc. 

It’s the NITI Aayog, India’s apex public policy think tank, which has detailed discussions with various ministries and departments and then makes recommendations to the union cabinet. 

The government is currently considering PLI proposals from 12 sectors, including leather and footwear, toys, cotton-based textiles, coalbed methane, coal gasification, bicycles, furniture, shipping containers, and chemicals for paint, and fertilizers. There is a lot of buzz on which sectors and eventually which companies will benefit if the manufacturing push is maintained in this year’s budget too. And why not. 

PLI has already generated about 40,000 jobs and has the potential to generate at least 20,000 more. Approvals to 717 applications under this scheme have been provided and more applications are under consideration.

State governments have taken to the program well, and used it to boost their production capacity and reach employment targets. Tamil Nadu has a 45% share in India’s leather exports and has asked for PLI incentives in the leather and footwear sector. 

India: The factory of the world?

While these sops and incentives are crucial to give the initial push, it is more important to create a conducive working environment to make this move more sustainable. 

India currently cannot compete with countries like Taiwan and Vietnam in terms of production and needs to provide incentives like these for another decade at the least to become a competitive market both in terms of production capacity and price. 

Only 2 of the 14 sectors are close to the targets since money allotment. Changes in labor laws, ease of approvals, and logistic support are some of the reforms needed to provide the necessary support to manufacturers.

And last but not least, unless there is transparent accounting and close monitoring of the scheme, it will be premature to consider the PLI as a stepping stone to make India truly the factory of the world.

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